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Vertical Product Differentiation, Entry-Deterrence Strategies, and Entry Qualities

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  • Noh, Yong-Hwan
  • Moschini, Giancarlo

Abstract

We analyze the potential entry of a new product into a vertically differentiated market. Here the entry-deterrence strategies of the incumbent firm rely on “limit qualities.” The model assumes quality-dependent marginal production costs and considers sequential quality choices by an incumbent and an entrant. Entry-quality decisions and the entry-deterrence strategies are related to the fixed cost necessary for entry and to the degree of consumers’ taste for quality. We detail the conditions under which the incumbent increases its quality level to deter entry. Quality-dependent marginal production costs in the model entail the possibility of inferior-quality entry as well. Welfare is not necessarily improved when entry is encouraged rather than deterred.

Suggested Citation

  • Noh, Yong-Hwan & Moschini, Giancarlo, 2006. "Vertical Product Differentiation, Entry-Deterrence Strategies, and Entry Qualities," ISU General Staff Papers 200611010800001442, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:200611010800001442
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    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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